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Sales and Use Tax: How Does it Work for In-State and Out-of-State Purchases?

Today’s society has come to enjoy many luxuries such as being able to purchase anything online with just the click of a mouse. Purchasers can now do all their holiday shopping at home and, thereby, avoid the long lines and the hassle of going from store to store to find all the gifts on their lists. When making these online purchases, purchasers often do not consider their state’s tax requirements. In fact, many purchasers prefer buying items from out-of-state merchants because it’s often cheaper than paying the required sales tax in-state merchants charge.

States, however, are becoming increasingly concerned with lost revenues from sales and use tax. Approximately 32% of state revenue and 11% of local revenue are derived from these taxes. In 2012, states are projected to lose a total of $11.4 billion in revenues from unreported sales and use taxes – California alone is expected to lose nearly $2 billion. With all that is at stake for state and local governments, enforcement of sales and use tax has become more important.

Sales Tax v. Use Tax

For starters, sales tax is the tax we pay on the items we purchase from in-state merchants. This tax is often collected at the point of sale and is added to the cost of the purchase. Use tax, alternatively, is the tax that the purchaser must remit to the state for the items purchased from out-of-state merchants for in-state use or consumption. In determining whether a merchant will collect sales tax, or place the burden on the purchaser to remit use tax, a few factors must be considered:

First, does the merchant have a “brick-and-mortar” store within the state of purchase? If the merchant has an actual store within the state, the merchant will be required to include sales tax in the final bill.

Next, a distribution site may provide nexus to require sales tax to be collected by the merchant, even if there is no “brick-and-mortar” store within the state. Companies such as Amazon.com, which only operate through online sales, may meet state nexus statutes through these distribution centers. Currently, Amazon.com has nexus and collects sales tax in California, Kansas, Kentucky, New York, North Dakota, Texas and Washington. Furthermore, in 2013 and 2014 Amazon.com will fall under the state’s nexus statute in Virginia, Indiana, Nevada, Tennessee and South Carolina.

Lastly, sales tax may be collected by out-of-state merchants based on consent agreements with state officials. Under these agreements, out-of-state merchants will charge the state’s sales tax rate to the purchase requiring the purchaser to pay the tax as if the item was purchased in-state.

What can online purchasers expect in the future? In 1992, the Supreme Court ruled that no state could constitutionally force out-of-state merchants to collect sales or use tax unless that merchant has nexus within the state. The Court, however, opened the door for Congress to pass a national law regulating online sales tax. Currently, there are several proposed laws pending.

In Ohio, use tax is reported on line 17 of the Ohio Form IT 1040. The amount of the purchases subject to use tax is not included in gross sales or income.